Economic Leadership: From Pittsburg to Copenhagen Via Two “Dissenting” Blue Bloods

Sales of previously owned homes fell unexpectedly last month, an industry group reported Thursday, showing that a budding recovery in the housing market remains weak and faltering.

A four-month streak of improvements in existing home sales gave way to a seasonally adjusted 2.7 percent dip in August, according to the National Association of Realtors, as prospective buyers of condos and single-family homes pulled back across the Northeast, the South and the Midwest …

Housing and real estate groups like the National Association of Realtors have called on Congress to extend or expand the tax credit for first-time buyers, saying that sales could slide back once it expires at the end of November.

While the program has helped to drive sales higher this summer, some economists say its effects are waning because most interested buyers have already taken advantage of the $8,000 credit.

The Realtors’ group estimated that 30 to 40 percent of all buyers were first-time homeowners.

[Some] economists said the fluctuations in home sales could reflect rising unemployment across the country.

Some 15 million people are now out of work and economists expect the unemployment rate to hit 9.8 percent when the government reports its monthly employment figures next week.

“The job market is the biggest thing that’s going to keep sales down next year,” said Patrick Newport, an economist at IHS Global Insight. “When people can’t find a job, they don’t move. They can’t buy or sell a home.”

The housing market, a source of so many of the country’s economic problems, caused more headaches for Wall Street on Thursday.

Stocks fell after a real estate group reported that sales of existing homes had dropped 2.7 percent in August. The figures disappointed economists and investors, who had been expecting a fifth straight month of gains, and shares skidded lower …

The selling ran through many sectors of the market.

The dip in sales of existing homes reflected broader worries about how the economy will perform as a panoply of support programs from the government slowly wind down.

Car dealers raised similar concerns about whether their sales would hold up after the conclusion of the government’s popular “cash for clunkers” rebate program.

On Wednesday, the Federal Reserve said it would gradually slow down a $1.45 trillion program to buy mortgage-backed securities, which aims to keep interest rates low, stretching it out it through the end of March.

Volcker, a top White House economic adviser, said Thursday the Obama administration’s proposed overhaul of financial rules would preserve the policy of “too big to fail” and could lead to future banking bailouts.

Mr. Volcker, a former Federal Reserve chairman, told Congress that by designating some companies as critical to the broader financial system, the administration’s plans would create an expectation that those companies enjoy government backing in tough times.

That implies those financial companies “will be sheltered by access to a federal safety net,” he said. He urged lawmakers to make clear that nonbank companies would not be saved with federal money.

[H]e took “as a given” that banks would be bailed out in times of crisis. But he said he opposed bailouts of insurance companies like the American International Group, the automakers’ finance arms and others.

“The safety net has been extended outside the banking system,” Mr. Volcker said. “That’s what I want to change.”

He said the administration’s proposal to create a new system for winding down large nonbank companies would make that easier.

The administration should make it clearer that a “safety net” would apply only to commercial banks, not investment companies or others.

Investors must understand that if a nonbank company fails, stockholders and bondholders’ money will be at risk, he added. He did, however, endorse other options for these companies, including forced mergers or liquidation …

In his appearance before the House Financial Services Committee on Thursday, Mr. Volcker endorsed a stricter separation between banks that hold deposits and investment banks. He said the “safety net” should be limited clearly to commercial banks, while investment banks should be excluded.

“Commercial banks are the indispensable backbone of the financial system,” Mr. Volcker said, giving consumers safe deposit accounts and financial advice.

Investment banks take on more risk and face conflicts of interest when they combine consumer financial services with major corporate deal-making. Mr. Volcker said it would be logical to prohibit commercial banks from trading in securities and derivatives.

In recent speeches, Mr. Volcker has expressed little enthusiasm for some of the initiatives under discussion in Washington, including regulating bankers’ compensation. He has said there is “ample justification” for public anger at pay practices that were “wildly excessive” and encouraged risk-taking at the expense of stability. But he warned against too much political involvement …

Mr. Turner, Britain’s chief financial regulator … insists on posing some uncomfortable questions for London financiers – and he is raising a bit of a ruckus in the process.

Mr. Turner is daring to ask the very question that many Britons, and indeed, many Americans, are asking themselves:

It has grown too big and too powerful. And, he contends, the bankers have co-opted many of the regulators who watch over them.

So Mr. Turner is proposing a few changes, none of which would make the bankers very happy. Tax financial transactions. Increase capital requirements. Shrink the financial industry, which, at its peak, accounted for roughly 11 percent of the British economy. Only then, he argues, can banks’ excessive profits – and bankers’ pay – be curtailed.

He said his agency, the Financial Services Authority, would recommend to leaders of the Group of 20 nations, who are meeting this week in Pittsburgh, that banks use their new profits to strengthen their finances, rather than to pay out lavish bonuses or stock dividends.

Banks “need to be willing, like the regulator, to recognize that there are some profitable activities so unlikely to have a social benefit, direct or indirect, that they should voluntarily walk away from them,” Mr. Turner [argues] …

Mr. Turner’s critique of modern finance is turning heads on both sides of the Atlantic. His central thesis – that banking has assumed an outsize role in economic life – is anathema to many of his establishment peers….

Labour and Conservative politicians seem to have finally found a point on which they agree: The City is vital to Britain, and imposing the kind of tax that Mr. Turner suggests would threaten London’s status as a premier financial center.

But to Mr. Turner, the point has been less about his proposal – a pragmatist, he realizes that there is little chance such a tax would win international support – than the reaction to it.

The uproar shows that the “quasi-religious” dogma of finance – that the markets are always right and that governments should let money flow freely around the world – is as ingrained as ever, he said. But now more than ever, given the events of the past year, regulators must challenge such notions, he said.

“We have begun to accept this idea that liquidity is the new God,” Mr. Turner said in an interview earlier this month.

“The ideology of efficient markets became deeply embedded within the regulatory community,” he continued. “And if you are of the belief that we have to challenge this, then you can’t help not to make speeches about it.”

And that is exactly what Mr. Turner has done, almost from the day that he took over as chairman of the Financial Services Authority during the very week Lehman Brothers collapsed.

Part Cambridge don, part moralist, he has, in effect, been running a tutorial on the origins of the crisis, and what must be done, to a class consisting of his fellow regulators, politicians, bankers and the broader public.

In March, he published the Turner Review, a 126-page report that combined eye-catching charts, intricate economic analysis and an overlay of thinly veiled disgust.

It became required reading in the City, as well as on Wall Street and in Washington.

Mr. Turner is certainly an unlikely rebel. He became wealthy working at McKinsey, the consulting company, and in 1995 became head of the Confederation of British Industry, Britain’s main business lobby.

Chairmanships to high-level policy panels followed, covering topics from the minimum wage, pensions and climate change – all sandwiched between a job as vice chairman of Merrill Lynch Europe from 2000 to 2006.

Some suspect Mr. Turner – nicknamed Red Adair in the 1990s after he wondered aloud if British workers had an adequate share of the economy – takes a dim view of free markets in general and enjoys railing against them.

Prime Minister Gordon Brown has played down Mr. Turner’s tax proposal. Such a tax would be impossible without international cooperation, the prime minister maintains. He made it clear that the British government would not be pushing for the tax at the Group of 20 meeting.

A French emissions exchange and a Chinese exchange are forming a carbon market standard for China, marking a step toward a voluntary system to limit greenhouse gas emissions from agriculture and forestry in the world’s top emitter.

The French company BlueNext, which is 60 percent owned by N.Y.S.E. Euronext, and the China Beijing Environment Exchange, a government-backed program, hope to expand the standard eventually to cover voluntary emissions reductions in Chinese transportation, construction and manufacturing …

Voluntary carbon standards provide a framework for developers of environmental projects – like reducing deforestation or storing carbon in soil through no-till farming – to get emissions reductions verified.

The groups said they hoped the standard would help attract investments from Chinese companies in these projects and make it easier for American companies to pay others to reduce emissions, rather than cut their own.

Details about how the standard would work are to be released during United Nations climate talks in Copenhagen this December.

Companies are racing to expand carbon markets in China before the meeting in Copenhagen, when 190 countries will try to reach a deal on global warming to succeed the Kyoto Protocol.

The talks are bogged down on how to share the burden between rich and poor countries on taking actions to reduce emissions.